Section 1031 Economic Studies

Two studies explore the micro- and macro-economic benefits of like-kind exchanges and the impact a repeal of Section 1031 would have on the economy. The Ling and Petrova microeconomic study provides an in-depth look at the impact of like-kind exchanges on the commercial real estate market. The Ernst & Young macroeconomic study takes a wide look at the impact of a repeal on the overall U.S. economy. Section 1031 like-kind exchanges play an important role in the U.S. economy: encouraging investment, contributing to federal, state, and local tax revenue, reducing the use of leverage, and improving liquidity in the market. Both studies recommend the retention of Section 1031.

Ernst & Young Macroeconomic Study

Description:

This Ernst & Young analysis examines the macroeconomic impact of recent proposals to repeal or limit IRC Section 1031 like-kind exchanges. The industries most affected by like-kind exchanges include real estate, transportation, equipment/vehicle rental and leasing, and construction. These industries, among others with high use, would suffer a disproportionate burded from any changes.

Findings:

The study finds that repeal of IRC Section 1031 would:

shrink the U.S. economy, by $6.1 to $13.1 billion annually

result in less federal tax revenue due to economic contraction

discourage and slow the rate of investment

negatively impact the overall economy, with an unfair concentration in certain industries

unfairly burden certain businesses and taxpayers

be at cross-purposes with the goals of tax reform.

Released March 2015, Revised November 2015

Ling & Petrova Microeconomic Study

Description:

This in-depth microeconomic study of the U.S. commercial real estate markets highlights the critical role that Section 1031 like-kind exchanges play in stabilizing rents, safeguarding property values and strengthening our economy.

Findings:

The study finds significant benefits from like-kind exchanges:

Like-kind exchanges encourage investment.

Like-kind exchanges contribute significant federal tax revenue.

Like-kind exchanges lead to job creation.

Like-kind exchanges result in less debt.

Supplemental findings to the Ling & Petrova microeconomic study were published as “The Benefits and Costs of Tax Deferral:
An Analysis of Real Estate Tax-Deferred Exchanges.” The report, released in August 2017, was authored by Prof. David Barker (Univ. of Iowa), Prof. David C. Ling (Univ. of Florida), and Prof. Milena Petrova (Syracuse Univ.).

Released July 2015, Supplemental Findings Released August 2017

Combined Implications on the U.S. Economy

The Ling & Petrova microeconomic study, focusing in-depth on the effects of a repeal of Section 1031 on the real estate industry, complements the findings from the Ernst & Young macroeconomic study focused on the effects of a repeal of Section 1031 on the overall economy.

Transactional activity would be reduced, inhibiting the economic stream generated by transactions;

The cost of capital would increase;

Average holding periods would increase;

The velocity of investment in the economy would decrease;

Real estate values would drop;

Rents would rise; and,

The economy would contract.

The Ernst & Young study determined that a repeal of Section 1031 would result in lower economic growth in the U.S. economy and was at cross-purposes with the stated goals of tax reform. The findings of both studies reinforce the argument that like-kind exchanges are an important capital formation tool, and they matter. Like-Kind exchanges provide an essential incentive to improve properties, increase investment, reduce leverage and reduce holding periods, all of which stimulates transactional activity. Like-kind exchanges help keep the economy moving. A repeal of the provision would unfairly burden certain industries and taxpayers, harm the economy as a whole and cost the government in the long run.